Based partly on this history, Moody’s Analytics estimates that a new rebate would have about three times as large an effect on growth next year as would making all the 2001 tax cuts permanent.
Yet a rebate still isn’t the best solution, according to the Moody’s analysis or, for that matter, common sense. Some households will surely put their rebate into a savings account or use it to pay down debt.
That is why the ideal solution tries to leverage government dollars with private dollars. The cash-for-clunkers program did precisely this last year, causing a jump in vehicle sales. So did a 2009 tax break for corporate investment, leading to an end-of-year spike in spending.
The tension with such tax cuts is between targeting and simplicity. Targeted ones can avoid showering too much money on households and businesses that were going to spend anyway.
One possibility is an expanded tax credit for new clean energy projects, which is favored by the White House and by at least two Republican senators, Orrin Hatch and Richard Lugar. Another is an expansion of the tax credit for businesses that increase their work force, like the one sponsored by Mr. Hatch and Charles Schumer, the New York Democrat. This time, though, it would not have to be restricted to companies hiring the long-term unemployed.
The disadvantage of these programs is that people have to figure out if they’re eligible and then fill out forms. A simpler approach — but a less targeted one — would temporarily cut the payroll tax, which finances Social Security and Medicare and is paid by both businesses and workers. By suspending the part that applies to businesses for a few months, Washington could lower the cost of keeping or hiring workers.
Either way, a couple of tax cuts along these lines could make good additions to a bill extending the Bush tax cuts for households making less than $250,000 a year. Economically, the extra cuts would have a bigger impact than an extension of all the Bush cuts. Politically, this kind of bill would force opponents to explain why they instead wanted smaller tax cuts for middle-class families and businesses and a bigger one for the affluent.
Of course, no temporary tax cut will solve the economy’s long-run problems. That’s a harder project, one that involves upgrading the skills of the work force, slowing the growth of health costs, reducing the deficit, lifting exports, restarting healthy wage growth and, yes, simplifying the tax code.
But we won’t make any of those tasks easier by falling into a double-dip recession or enduring months more of halting growth. The aftermath of a financial crisis is usually difficult. It’s not yet time to declare victory.